Comgest’s star Japanese equity duo is upping exposure to small-cap names and trimming blue chip bets after a period of outperformance.
Kaye, who co-runs the fund with Chantana Ward, said there are hidden gems coming to the fore and several examples of quality growth firms further down the cap structure.
‘Since the end of 2013 we lowered our weight in a number of 2013 winners, mostly blue-chip names which had been supported by strong foreign investor inflow,’ Kaye said.
‘Our performance has therefore been sustained so far this year by newer holdings, which have generally been less well-known and of smaller market capitalization.’
‘Our long-term performance continues to be driven at least 70% by major holdings, denial of the adage that “buy and hold does not work in Japan”.'
Five bets to back in Japan
Kaye highlighted five stock picks which have helped drive performance over the last quarter, which represent a cluster of new ideas and longer-term holdings.
‘Gulliver is used-car major which benefits from a growing appreciation in Japan of used cars and from its shift to retail. We also like M3, an online pharmaceutical marketing platform which is developing into several new functions, and Sysmex, a haematology equipment global company’.
‘Two other companies we favour are Hikari Tsushin, a telecommunications equipment and IT service vendor with an unparalleled franchise in small and medium companies, and Lixil, a home remodelling major which is looking to consolidate that industry while adding overseas franchises,’ Kaye said.
These five positions represent a wider preference for consumer and tech stocks in the fund. Kaye said these sectors, as well as telecoms, had been the primary driver for the fund outperformance versus the Topix benchmark over the last three years.
Kaye and Ward have a 16.4 percentage point overweight to IT when compares to the fund’s benchmark, while also running significant underweights in industrials and financials, according to the latest factsheet.
Abenomics to outperform
Comgest’s Japanese equity funds rely on strong optimism on the success of Abenomics and a depreciating Yen, as discussed in their market commentary entitled Quality Growth Wins in Japan.
‘In the medium-term, premier Abe’s third arrow, in particular a less punitive corporate tax rate, may become a powerful driver for the Japanese equity market,’ Kaye said.
‘This may raise awareness of the globally competitive profitability of corporate Japan and catapult it to a similar level as Europe or the US.’
Over the three years to the end of March 2014, the Comgest Growth Japan Yen fund has returned 66.1% against an index rise of 47.7% over the same period.